Trump Tariffs On India To Hit Exports, Stir Volatility, Trigger Global Ripples: Nuvama

US President Donald Trump's announcement of a 25% tariff on Indian exports and unspecified penalties linked to India's continued imports from Russia caught markets off guard with a rate higher than anticipated.

While lower than the tariffs on China (55%) and Bangladesh (35%), it exceeds those on several emerging peers, such as Vietnam, Indonesia and the Philippines (around 20%). The new tariff is also steeper than the US' current weighted average tariff of 18%, and similar to South Korea's rate.

India's goods exports to the US — worth around $87 billion and accounting for roughly 20% of total goods exports and 2.5% of the GDP — are likely to take a hit, according to Nuvama.

Key sectors, including textiles, pharmaceuticals, electronics, agri-products and machinery, are expected to feel the brunt. However, the brokerage notes that the direct impact on India’s GDP will be limited due to the relatively small share of US exports in overall economic output.

There are mitigating factors. One, part of the export loss could be offset by redirecting trade to alternative markets. Two, the recent weakness in the Indian rupee, if sustained, could cushion the impact by improving the price competitiveness of Indian goods globally.

Yet the broader and more critical concern, Nuvama highlights, lies in the indirect effects of these tariffs. The combination of higher tariffs, a weaker dollar (down 8–10%), and elevated US interest rates could shrink the US trade deficit.

While that may serve domestic US objectives, it risks triggering a deflationary impulse globally, reducing demand, trade volumes and corporate earnings. This would have far-reaching consequences, including for India, especially if export-oriented economies, such as China and Germany, fail to boost domestic consumption.

On the capital flows front, the higher-than-expected tariffs could prompt foreign investors to turn risk-averse. With domestic demand still tepid, volatility in capital flows — especially foreign institutional investor activity — is expected to intensify.

Indian markets could remain choppy, particularly in sectors heavily reliant on US demand, such as pharma, auto ancillaries, industrials and tiles. Small- and mid-cap stocks, along with high-beta sectors like real estate and NBFCs, are at greater risk of capital outflows.

On the upside, a weaker rupee could help IT companies, which may outperform given current subdued valuations. Against this backdrop, Nuvama suggests that the Reserve Bank of India may need to consider further monetary easing to soften the blow on external trade and maintain macroeconomic stability.